Fine: Washington, D.C., on oil and gas

The "deal" between the parties over the energy future of the United States and the San Juan Basin at the end of 2015 was the most misguided example of politics at the fuel pump since the 1970s. Then it was retail price control and now it’s a free-for-all in the price of oil in the world market with West Texas Crude approaching 10-year lows.

Lifting the restriction on exporting crude oil adds American oil to a world market which is over-supplied. Expect no cash flow increase for American producers and still lower world prices than with the restriction or ban in place.

This is not the place to assess the other side of the "deal." However, tax credit extensions for wind and solar as alternative fuels to replace coal and later natural gas are no longer of concern to the Republican Party in Congress.

With petroleum economics based on market prices, there is virtually no way that the "deal" will bring about tens of thousands of new jobs in the oil and gas fields. How does exporting crude oil lead to increased drilling and rig deployment if this increases supply in an oversupplied world market? On the contrary, it leads to lower prices and negative cash flows for producers who must cut their workforces.

If oil and gas prices rebound in the next three years, the alternative fuels are beneficiaries as tax credits shape new non-fossil fuel investment, offsetting the risk of lower oil and gas prices, This was no doubt the objective of the climate change politics of Paris and the Democratic Party in Congress as well as the White House.

Although U.S. oil refiners will have a transportation cost tax adjustment from the "deal," what prevents them from buying foreign oil at lower prices than American oil (North Sea Brent at declining prices)?

For more than a year, I have developed an analysis of an OPEC/Saudi Arabian price war against American shale or light tight oil producers. This was regarded lightly while industry and Wall Street funds held on for a price recovery by last June. Now what I wrote in these columns is "mainstream" and U.S. producers survive through selling forward with "hedges."

What will be left of the San Juan Basin oil and gas economy in 2017? Will exporting crude oil to Poland or Sweden, against Saudi discounts, contribute to a Four Corners economic rebound?

Replies to This Discussion

I agree with you. I don't see any good coming from the lifting of the export ban. At least under the current conditions. I think that when there was talk about lifting the ban earlier last year that is what started the Saudis to start protecting their market share by producing as much as they can and putting the shalers out of business. On the other hand if things blow up in the Mid East then we will be able to export to the Europeans.

The author neglects the cost of transportation of the resource. The US will never be a buyer of Brent Crude, Europe will soak it all up. There is little production in Europe of oil, some yes, but not much. So most of it comes out of the North Sea, Libya, Algeria and the Middle East, not the US, Mexico or Venezuela. Japan sees to have a straw directed at North Slope oil in Alaska, though a good deal of it goes down to California. And they are still pumping oil in and around Santa Barbara, CA as well as Los Angeles.

I am sure it costs a great deal more to ship oil from the North Sea to the US than from lets say Venezuela. Mexican oil comes into the US too. And yes, oil does come out of Saudi Arabia but not Iran.

And oh, yes, Brent Crude always cost more than West Texas Intermediate oil. So there is the added cost at the well head difference to deal with.

The US is still importing oil, it does not meet all the demands here by any means. We are still a net importer, just not as much as in the recent past.

I am sure if the Saudi's and Iranians start shooting at each other directly, then things may realign and change. Might make Russia rich again.

I read a month or so ago, that there are six oil refineries idle in Louisiana alone. I am sure some of them can be tuned up to take our crude versus Brent Crude, or whatever else is around. Those refineries were tied to oil fields that are now more or less depleted, but a few pipelines could fix that or even relocation of the refiners could be done. Just depends on the economics of the time and place.

Can you list those six idle refineries, William? Or provide a link to an article. That seems a surprising statistic. It doesn't ring true to me. Except for down time for repair and maintenance everything that I have read seemed to indicate that refineries were operating near capacity.

I did a simple web search on closed Louisiana oil refineries and found a list of seven (7) refineries shut down, closed. Some were for sale, some were in dismantlement, and one was in site clean up (with accompanying lawsuits). I suspect they were all out of date, lost their source of raw product, were located poorly, or what have you. It was not hard to find.

When you used the term, "idled", it gave me the impression that you were referring to functional plants not operating due to crude supplies. Any operable refinery would be running close to capacity considering the crack spread. There is no shortage of crude and refineries are at the top of the list of industries benefiting from the depressed price.

While it may not pay near-term benefits, I think gaining the approval to export is important to the US and our oil producing regions and companies. I agree with most of what Mr. Morrison says, but what do Libya, Algeria Venezuela and the Middle East have in common, and that is in sharp contrast to the US? Risky long term political reliability. Europe will not want to have to rely on Mr. Putin in the event supplies are closed off from the countries I list, which is something that the leaders of Europe must consider. If they can get crude from the US, regardless of price, in the face of disrupted supplies from the Middle East, then that's good for them to know, and an opportunity for the US. Whether the US will want to have crude shipped elsewhere when there might be a shortage is another issue. But at least with this change in federal law, all of the options can be considered.

I agree that the potential global political benefits of U.S. crude export could be significant in the future. As will LNG. Currently the Saudis are in a crude price war with Russia and that will make it tough for U.S exports to compete in Europe. It's hard to tell how the global markets will evolve because it's simple to talk about crude as a generic product without taking into account whether is it sweet or sour, light or heavy. U.S. Gulf Coast refiners have invested to retrofit plants to process more light shale oil but they were designed to primarily use heavier crudes from exporter such as Venezuela. That, in part, is why the U.S. continues to import crude. Not only is U.S. shale oil light, it is not all oil. Much of the liquids reported as oil, in some cases such as LA, is condensate (gaseous at depth, liquid at surface temp and pressure) and it's very light.

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